Who is Holding Your Leash?

On PIMCO’s blog, Gene Frieda writes that “markets do not explode every time volatility is low, but volatility has always been extremely low when markets have exploded.” This reminded me of the variable or intermittent reward system I stumbled upon when researching training techniques for my dog.

The idea is that instead of getting a reward every time the dog performs the desired behavior, you reward on a variable schedule. For example, you’d reward a treat for every 5 times the dog performed the ‘sit’ command properly. Sometimes you reward after 3 sits, sometimes you reward after 7 sits, but it averages out to every 5 sits. Here’s the crazy thing: it works on people, too. Casinos have understood this for a long time. This is also why your significant other is on social media during dinner. They are looking for that dopamine hit that social media provides randomly.

I admit this is a flawed analogy. The low volatility is sometimes followed by a negative rather than positive interaction. Few of us have been investing long enough to have personally experienced several low volatility regimes. Even fewer were actively aware that volatility was low. However, the presentation of the message feels like a piece of the behavioral investing puzzle even if the message itself is less than helpful. What is PIMCO’s goal in writing a piece like this? Are we supposed to do some hedging trades? Buy or sell the VIX? Maybe de-risk by selling equities and reallocating those funds with a certain fixed income manager? Or maybe I’m just a cynic.